Honeywell International Inc. — 2019 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial amounts are in millions except per-share data. Honeywell operates four reportable segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $9,086 | $10,762 | $27,213 | $32,073 |
| Gross margin | 33.5% | 29.8% | 33.8% | 30.3% |
| Income before taxes | $1,967 | $1,858 | $5,791 | $5,767 |
| Net income attributable to Honeywell | $1,624 | $2,338 | $4,581 | $5,044 |
| Diluted EPS | $2.23 | $3.11 | $6.25 | $6.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4,283 | $4,875 |
- Quarterly sales fell 16%; nine-month sales fell 15%. Management attributed most of the decline to the 2018 spin-offs of Transportation Systems and Homes and Global Distribution, with foreign exchange also a headwind. Reported organic sales grew 2% in Q3 and 4% year to date.
- Quarterly net income attributable to Honeywell declined 31%, while income before taxes increased. The comparison was affected by the prior-year tax benefit: Q3 2018 included a reduction of accrued withholding taxes related to unremitted foreign earnings. Effective tax rates were 16.2% in Q3 2019 versus (26.8)% in Q3 2018, and 19.9% versus 11.8% year to date.
- Gross margin improved, reflecting segment margin gains and lower repositioning charges and pension service costs. SG&A was $1,296 in Q3 and $4,046 year to date, down year over year in dollars, primarily reflecting the spin-offs and currency effects.
- Segment trends were mixed. Q3 sales and profit rose in Performance Materials and Technologies; Aerospace profit rose despite sales declining after the Transportation Systems spin-off. Honeywell Building Technologies and Safety and Productivity Solutions reported lower profit. Safety and Productivity Solutions cited weaker Productivity Solutions volumes, including timing of large projects.
Cash, debt and capital allocation
- Nine-month operating cash flow was $4,283, down $592 year over year, primarily due to a $581 million unfavorable working-capital impact and $205 million in higher cash tax payments; $219 million of reimbursements from Garrett- and Resideo-related agreements partly offset the decrease.
- Investing cash flow was an outflow of $122, versus an inflow of $1,433 in 2018, mainly reflecting increased investment in short-term marketable securities. Financing cash flow was an outflow of $2,491, including $3,650 of share repurchases and $1,798 of cash dividends.
- At September 30, cash and cash equivalents were $10,908 and short-term investments were $1,456. Commercial paper and other short-term borrowings were $3,422; current maturities of long-term debt were $4,088; long-term debt was $11,101. Credit facilities had no outstanding borrowings.
- Honeywell issued $2.7 billion of senior notes in August, primarily to prefund repayment of notes due October 2019. The balance-sheet debt carrying amount, including current maturities, was $15,189; including short-term borrowings, reported borrowings totaled $18,611.
- The company repurchased $3,650 of shares in the first nine months. Of the $10 billion repurchase authorization, $7.7 billion remained available at quarter-end. The quarterly dividend was increased 10% to $0.90 per share effective with the fourth-quarter 2019 dividend.
Outlook, management commentary and risks
- Management expected 2019 cash spending on repositioning actions of approximately $225 million, funded from operating cash flow. Spending was $149 million in the first nine months.
- The filing does not provide a clear full-year sales, earnings or cash-flow guidance figure. Management cautioned that quarterly and year-to-date results should not necessarily be taken as indicative of the full year.
- Q3 repositioning and other charges were $96 million, versus $299 million a year earlier; nine-month charges were $306 million versus $756 million. The prior-year amounts included substantially higher environmental and asbestos-related charges. Current-year charges included workforce reductions and project exit costs.
- Environmental liabilities were $785 million at September 30. The company said future costs and timing are uncertain and could materially affect results or operating cash flows when recognized or paid, but it did not expect a material adverse effect on consolidated financial position. Receivables under the Resideo indemnification agreement included $578 million in current and long-term assets.
- Asbestos-related liabilities were $2,440 million, with related insurance recoveries of $452 million. Honeywell maintained a $743 million NARCO Trust liability because it lacked sufficiently reliable claims data; it said a future estimate change could be material. Garrett disputed the enforceability and Honeywell’s compliance under an indemnification agreement; Honeywell disagreed and continued discussions.
- The SEC concluded its investigation into prior Bendix asbestos accounting and said it did not intend to recommend enforcement action. A shareholder securities class action remained pending. The company also reported cooperation with DOJ, SEC and Brazilian authorities in investigations concerning Petrobras-related third parties and a former subsidiary’s engagement of Unaoil; Honeywell did not anticipate a material adverse effect based on facts then known.
- Management reported no material change in disclosed risk factors or market-risk information, and concluded disclosure controls were effective at period-end.
Important facts for investors to verify
- Separate the impact of the Garrett and Resideo spin-offs from ongoing organic performance when comparing reported sales and segment results.
- Review the causes and sustainability of the gross-margin improvement, including productivity, pricing, inflation, and lower repositioning costs.
- Assess cash conversion and working-capital trends, particularly receivables, payables, and cash tax payments.
- Track upcoming debt maturities, liquidity sources, and the use of cash for repurchases and dividends.
- Monitor asbestos and environmental reserve assumptions, insurance recoveries, and the Garrett and Resideo reimbursement arrangements, including the Garrett dispute.
- Check subsequent filings for full-year guidance and developments in the pending shareholder litigation and government investigations.